Instructions
Evaluate the Investment Practices and Performance at the Teacher Retirement System of Texas
June 17, 2016
Proposal Preparation Instructions – Federal Portion of the Texas Statewide Single Audit. January 11, 2016
17
Texas State Auditor’s Office
Request for Proposal (RFP)
for
Evaluate the Investment Practices and Performance at the Teacher Retirement System of Texas
Issued: June 17, 2016
Receipt of Proposal Deadline: 5:00 p.m. (CST), July 18, 2016
Contents:
Part 1. Request for Proposal – Overview, Published in the Electronic State Business Daily 3
Part 2. Preparation Instructions, Published in the Electronic State Business Daily 11
Failure to complete and return all requested documentation in compliance with the Preparation Instructions may result in the disqualification of a proposal.
Persons who need accommodation under the Americans with Disabilities Act shall contact the State Auditor’s Office Contract Liaison after the request for proposal posting date and fully describe the accommodations necessary.
Part 1
Request for Proposal – Overview
State Auditor’s Office
REQUEST FOR PROPOSAL
Notice of Invitation for Proposal: The State Auditor’s Office (SAO) in accordance with Section 825.512 of the Texas Government Code, is seeking proposals from independent firms to evaluate investment practices and performance at the Teacher Retirement System of Texas (TRS).
Background Information about the Teacher Retirement System of Texas:
History
TRS was established by amendment to the Texas Constitution in 1936 and enactment of statutes in 1937 to provide a retirement program for persons employed in public education in professional and business administration, supervision, and instruction. Benefits were later expanded to include disability, death, and survivor benefits. In 1949, membership was expanded to include all employees of public education, and in 1985 the administration of a health insurance program, TRS-Care, for public school retirees was added. The passage of the Texas Public School Employees Group Insurance Act in 1995 gave additional responsibilities for TRS to administer health insurance program benefits to active school employees, beginning with the 1996-1997 school year.
A general overview of the powers and duties of TRS are set forth in the Texas Constitution, Article XVI, Section 67, and the Texas Government Code, Title 8, Subtitle C. TRS also administers proportional retirement benefits under Texas Government Code, Chapter 803. The statutory authority for TRS-Care health insurance program is Texas Insurance Code, Chapter 1575.
TRS has approximately 600 employees and an annual operating budget of $113 million. TRS’s responsibilities include the maintenance of an actuarially sound retirement system and the provision of health insurance services to retirees and active public school employees. To meet these responsibilities, TRS must prudently manage its $126.6 billion (market value) investment portfolio.
The retirement program administered by TRS is a defined benefit plan. The plan provides members, after certain conditions are met, with life-long benefits that are determined by the member’s length of service and average salary level before retirement. As of August 31, 2015, TRS reported 1,459,243 members, which consist of 1,081,505 active members and 377,738 retiree members. For the fiscal year ending August 31, 2015, TRS paid approximately $9.4 billion in retirement benefits.
Authority
The Texas State Constitution (Article XVI, Section 67) provides that TRS’s Board of Trustees (the “Board”) shall invest TRS’s funds in such securities as the Board may consider prudent investments. The investment policy adopted by the Board establishes asset allocation and portfolio strategies it believes are prudent, in compliance with constitutional restrictions, and appropriate for the long-term objectives of the Fund (Teachers Retirement System Pension Trust Fund).
Governance
The Board is assisted in the implementation of investment objectives by an investment and executive staff and outside professional advisors.
The Investment Management Committee of the Board is responsible for oversight of investment activities. It meets at least quarterly prior to the regular board meeting with representatives of the staff and investment advisors, as required, to receive reports from the staff and investment advisors; to review performance, asset allocation, and portfolio characteristics; and to obtain such expert advice and assistance with respect to its action as is necessary to exercise its fiduciary responsibilities.
TRS retains Aon Hewitt Investment Consulting Inc. of Chicago as the general outside investment advisor. It also retains Dr. Keith Brown, professor of the University of Texas at Austin, as the independent investment consultant to advise the Board. In addition, Gabriel, Roeder, Smith & Company is retained as the consulting actuary.
Operations
All purchases, sales, and exchanges of securities are to be made by the investment staff and external money managers in accordance with the constitutional authority granted to the Board, further restricted by governing state laws and the investment policy adopted by the Board.
The Investment Management Division, which is led by the chief investment officer, consists of 13 primary groups: (a) Asset Allocation, (b) Internal Public Markets, (c) External Public Markets, (d) Private Equity, (e) Real Assets, (f) Energy and Natural Resources, (g) Strategic Partnership and Research,
(h) Emerging Managers, (i) Trading Management Group, (j) Risk, (k) Investment Operations,
(l) Professional Development, and (m) Executive and Administrative.
TRS retains State Street Bank and Trust Company of Boston as master custodian and securities lending agent and provider of performance measurement services.
Investment Portfolio
As of December 31, 2015, TRS’s $126.6 billion investment portfolio consists of the following asset classes:
TRS’s Investment Portfolio as of December 31, 2015Asset / Market Value
(in billions) / Percentage
Public Equity – U.S. / $ 23.4 billion / 18.5%
Non-U.S. Developed / 18.9 / 15.0%
Emerging Markets / 11.7 / 9.2%
Other Global Equity / 1.0 / 0.8%
Directional Hedge Fund / 6.0 / 4.7%
Private Equity (in limited partnerships) / 15.0 / 11.8%
Subtotal, Global Equity / $76.0 / 60.0%
US Treasuries / 12.7 / 10.0%
Stable Value Hedge Funds / 5.3 / 4.2%
Tactical Credit / 2.4 / 1.9%
Cash Equivalents / 1.4 / 1.1%
Subtotal, Stable Value / $21.8 / 17.2%
Treasury Inflation Linked Bonds / 5.5 / 4.3%
Real Assets (in limited partnerships) / 17.4 / 13.8%
Energy and Natural Resources / 2.2 / 1.7%
Commodities / 0.1 / 0.1%
Subtotal, Real Return / 25.2 / 19.9%
Risk Parity / $3.6 / 2.9%
TOTAL Fund / $126.6 / 100.0%
TRS Private Equity investments as of December 31, 2015, totaled $15.0 billion and the Trust has a long-term target allocation of 13 percent. The portfolio invests across multiple sectors, geographies, and strategies including buyout, growth equity, venture equity, and credit. The primary long-term objective of the Private Equity portfolio is to develop a prudently diversified portfolio of investments that is expected to enhance the overall risk return profile of the Total Fund.
TRS Real Asset investments as of December 31, 2015, totaled $17.4 billion and the Trust has a long-term target allocation of 16 percent. The portfolio invests across multiple property types, geographies, and strategies including core, value-added, and opportunistic real estate, infrastructure, and credit. The primary long-term focus of the Real Asset portfolio is to contribute favorably to diversification of the Total Fund through exposure to real assets’ low or negative correlation to public markets and provide competitive returns through capital appreciation.
SECTION 2: Instructions to Proposers
2.1 Purpose of the Proposal and Scope of Work
The objective of this Request for Proposal (RFP) is to select an independent firm to evaluate investment practices and performance at TRS as defined in the following tasks. The purpose of the proposal is to demonstrate the qualifications and competence of the Proposer to provide the SAO with the requested services at a reasonable cost.
The proposal must include a plan of work, which should describe in detail the methodology to be employed by the Proposer to perform the investment performance and practice review detailed by the Proposer. The detailed plan of work should follow the outline below and separately address each task area and bullet items.
The proposal shall provide that, where possible, the Proposer will compare TRS’s investment operations and investment performance with similar agencies, universities, or funds in Texas and other states.
The SAO will evaluate proposals submitted in response to this RFP to evaluate investment practices and performance at TRS. All terms of a proposal, specifically including price, are subject to negotiation by the SAO.
Proposer elected for this engagement would be expected to conduct the work as required in the RFP as indicated below.
TASK AREA 1: INVESTMENT RISK MANAGEMENT
Evaluate the effectiveness of TRS’s investment risk management function to determine if various types of risks relevant to management of investment portfolios are identified, measured, managed, and reported on a regular basis for prudent investment decision making. Consider the following:
· Adequacy of the Board’s policies governing risk management and oversight, including the types of risks, risk measures, and risk limits.
· Compliance with the requirements of the Investment Policy Statement.
· Adequacy of the process to properly classify new investments within the portfolio.
· Adequacy of the process to monitor the use of leverage in the portfolio, including leverage by external managers.
· Effectiveness of the process for monitoring and measuring absolute and relative risk exposure of the Trust.
· Appropriateness of the risk management group managing TRS portfolios.
· Appropriateness of risk measurement and calculation methodologies.
· Adequacy and appropriateness of the risk areas evaluated for new manager certification.
· Adequacy and effectiveness of the process for monitoring underperforming portfolios and recommending changes.
· Adequacy of the reporting of risk monitoring activities and results to executive management and the Board.
· Comparison of TRS’s investment risk management function with peers regarding program goals, responsibilities, and risk measurement, monitoring, and reporting activities.
· Potential opportunities for improving TRS’s investment risk management function.
TASK AREA 2: INVESTMENTS IN REAL ASSETS
Evaluate the effectiveness of TRS’s real assets investment program to determine if it is achieving its goals and objectives – e.g., the program has been providing competitive returns through capital appreciation and contributing favorably to diversification of the Trust through exposure to real asset’s low or negative correlation to the Public Markets portfolios. Consider the following:
· Appropriateness of TRS’s goals and objectives of investing in real assets.
· Adequacy of the Board’s policies governing real assets.
· Effectiveness of TRS’s investments in real assets – i.e., whether TRS has been meeting the goals and objectives of the real assets program.
· Adequacy of TRS’s identification of significant risks related to the real assets program.
· Compliance with the requirements of laws, regulations, and investment policies.
· Evaluate TRS’s current structure for investing in real asset investments and compare that structure to other potential investment methods.
· Evaluate real asset investment strategies currently not employed by TRS that could be advantageous for the fund.
· Adequacy of the level of information TRS receives from partnerships, including information on fund, property level details, investment valuations, and fees via the TRS reporting template.
· Adequacy of the reporting of investing activities/results of TRS’s investments in real assets to executive management and the Board.
· Potential opportunities for improving TRS’s policies, procedures, and practices for investing in real assets.
TASK AREA 3: INVESTMENTS IN PRIVATE EQUITY
Evaluate the effectiveness of TRS’s private equity investment program to determine if it has been contributing to the achievement of its investment goals and objectives. Consider the following:
· Appropriateness of TRS’s goals and objectives of investing in private equity.
· Adequacy of the Board’s policies governing private equity.
· Effectiveness of TRS’s investments in private equity – i.e., whether TRS has been meeting the goals and objectives of the private equity program.
· Adequacy of TRS’s identification of significant risks, including liquidity risks, related to the private equity program.
· Adequacy of the level of information TRS receives from partnerships, including information on fund, company level detail, investment valuations, and fees via TRS reporting templates.
· Adequacy of the reporting of investing activities/results of TRS’s investments in private equity to executive management and the Board.
· Potential opportunities for improving TRS’s policies, procedures, and practices for investing in private equity.
2.2 Deliverables
The proposal should provide for the following deliverable to be provided to the SAO and TRS:
1. Engagement plan and methodology used to accomplish engagement. Plan and methodology shall be approved by the SAO with input from TRS.
2. Written progress reports provided monthly to the SAO and TRS. Reports will be provided more often upon the request of the SAO. Such progress reports should specifically identify the work performed to date and preliminary findings or recommendations. One of these reports should be presented as part of a status meeting to SAO and TRS personnel in Austin.
3. Draft of preliminary issues and recommendations. The proposal should provide that the SAO and TRS shall have the opportunity to review and comment upon preliminary findings or recommendations during the course of the engagement and that all such communications will include the SAO. TRS and the SAO shall be given a minimum of 10 working days to review and comment on preliminary issues/findings and recommendations. During this time period, TRS or the SAO may request an additional 5 working days if necessary to complete review and comment on the issues/findings and recommendations.
4. The proposal should provide that the final report will include, at a minimum, the following elements:
· A description of the work performed;
· Findings and recommendations, if appropriate, with respect to such work;
· Comments or responses to findings and recommendations from TRS management; and
· Specific and concrete proposals to achieve any improvements recommended by the proposer. Each recommendation shall be assigned a priority value and to the extent possible include an analysis of potential costs or savings associated with implementation.
The proposal should provide that all work, including the proposer’s delivery of 7 bound copies of the final report and a “PDF” version of the report to the SAO, will be completed by December 3, 2016.
The SAO will notify the Proposer within 5 working days if any deliverables submitted are not acceptable. The Proposer will have 5 working days to address the concerns of the SAO.